Assets are a company’s resources, such as inventory and equipment. They sometimes tie up a significant amount of money, so you want to make sure your small business squeezes as much benefit from them as possible. The operating-cash-flow-to-total-assets ratio is a financial metric you can use to quantify such benefits. This ratio measures the amount of operating cash flow you generate for every dollar of assets you own. The higher the ratio, the more efficiently you use your assets.

The Formula

The operating-cash-flow-to-total-assets ratio is expressed as a percentage and equals net cash flows from operating activities divided by average total assets, times 100. Average total assets equals total assets at the end of the current period plus total assets at the end of the previous period, divided by 2. You can find total assets on your balance sheet. Because the balance sheet reports assets only at the end of the period, the formula uses average total assets as an estimate of the assets held throughout the period.

About Operating Cash Flow

Operating cash flow, or net cash flows from operating activities, is the cash a business generates from its primary business operations during a period. It equals the cash collected from customers plus cash from interest income minus the cash spent on operating costs -- the costs necessary to produce sales, such as rent and wages. Operating cash flow excludes cash generated from secondary business activities, such as selling equipment or obtaining a loan. You can find operating cash flow on your cash flow statement.

Calculation Example

Assume your small business generates $300,000 in operating cash flow during the year. Assume you have $1.6 million in assets at the end of the current year and had $1.4 million at the end of last year. Your average total assets equals $1.5 million, or $1.6 million plus $1.4 million, divided by 2. Your operating-cash-flow-to-total-assets ratio is 20 percent, or $300,000 divided by $1.5 million, times 100. This means you produce 20 cents of operating cash flow for every dollar of assets you own.

Analysis

An acceptable operating-cash-flow-to-total-assets ratio depends on the particular industry in which your small business operates. To find out where you stand, compare your ratio with those of your competitors. Because these companies tend to have assets and cost structures similar to yours, their operating-cash-flow-to-total-assets ratios provide a good benchmark. Also, compare your ratio internally over multiple periods to identify any positive or negative trends. A rising ratio and one that exceeds the industry average suggests you might have a competitive advantage over other companies.

Considerations

Sometimes a small business generates negative operating cash flow. This occurs if cash operating costs exceed the cash collected from customers and interest income. The negative figure causes the operating-cash-flow-to-total-assets ratio to also be negative. When this happens, the closer the negative percentage is to zero, the better. A lower negative figure suggests you lost less cash from your operations during the period than a large, negative ratio. For example, a ratio of -5 percent is better than -30 percent.